2018 Grant Schools Provident Fund

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Grant Schools Provident Fund

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Annual Report 2018

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OTHER INFORMATION

Funds Section Education Bureau

Ms LAM Wing-hop, Sandy Senior Accounting Officer

Room 1517, 15/F Wu Chung House 213 Queen’s Road East

Wanchai Hong Kong

Secretary

Ms HON Hin-yan Education Officer

School Administration Division Education Bureau

5/F, East Wing, Central Government Offices 2 Tim Mei Avenue

Tamar Hong Kong

Treasurer

Ms LEUNG Yin-fun, Fanny

Assistant Director of Accounting Services The Treasury

Room 2701, 27/F, Immigration Tower 7 Gloucester Road

Wanchai Hong Kong

Auditor

Mr John CHU, JP Director of Audit

26/F, Immigration Tower 7 Gloucester Road Wanchai

Hong Kong

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CONTENTS PAGE

Foreword 1

Board of Control 4

Investment Sub-committee 7

Chairman’s Report 9

Treasurer’s Report 11

Number of Contributors (2009 – 2018) 17

Dividend Declared and Investment Return (2009 – 2018) 18

Net Assets (2009 – 2018) 19

Spread of Net Assets 20

Report of the Director of Audit 21

Balance Sheet 24

Income and Expenditure Account 25

Reserve Fund 26

Statement of Changes in Net Assets Available for Benefits 27

Statement of Cash Flows 28

Notes to the Financial Statements 29

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FOREWORD

The Fund

The Grant Schools Provident Fund (The Fund) is governed by the Grant Schools Provident Fund Rules made under section 85 of the Education Ordinance (Cap. 279).

The Fund is a defined contribution retirement scheme established to provide for payments upon retirement, resignation, dismissal, termination of contract or death of contributors.

Contributors refer to teachers in grant schools and also, with effect from 19 May 2000, teachers in Direct Subsidy Scheme (DSS) schools who contribute to the Fund.

Board of Control

The complete administration and control of the Fund, subject to the Fund Rules, is vested in the Board of Control, the composition of which is as follows:

Chairman : nominated by the Grant Schools Council Vice-chairman : nominated by the Grant Schools Council

out of the 8 additional members Permanent Secretary for Education or his representative Director of Accounting Services or his representative Eight additional members :

(a) 2 nominated jointly by contributors who are members of the staff of Roman Catholic boys schools in Hong Kong,

(b) 2 nominated jointly by contributors who are members of the staff of Roman Catholic girls schools in Hong Kong,

(c) 2 nominated jointly by contributors who are members of the staff of the Diocesan Boys’ School, the Diocesan Girls’ School, St. Paul’s Co-educational College, St. Paul’s College and St. Mark’s School, (d) 1 nominated jointly by contributors who are members of the staff of

Ying Wa College, Ying Wa Girls’ School and the Methodist College, and

(e) 1 nominated jointly by contributors who are members of the staff of St. Stephen’s Girls’ College and Heep Yunn School.

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Meetings of the Board of Control

The Board holds an annual general meeting to receive and consider the annual financial statements of the Fund and to declare the annual dividend for contributors. It also holds other meetings during the year as and when required. Five members form a quorum. All matters arising before any meeting of the Board are determined by a majority of the members present and voting thereon.

Contributions and donations

Contributors’ contributions and the matching donations from the Government and DSS schools are made monthly to the Fund according to the following scale as a percentage of a contributor’s basic salary, including any approved allowance:

No. of years of continuous contributory service

Teacher’s contribution

Donations from the Government and

DSS schools

% %

Less than 10 5 5

10 to less than 15 5 10

15 or more 5 15

Benefits

Contributors are entitled to a lump sum payment when they cease to be contributors to the Fund. Subject to certain exceptions laid down in the Fund Rules, the amount of payment is determined as follows :

Length of contributory service Benefits

10 years or more All accumulated contributions and donations from the Government and DSS schools and dividends thereon.

5 years to less than 10 years All accumulated contributions and dividends thereon and 10% of the donations from the Government and DSS schools and dividends thereon for each complete year of contributory service.

Less than 5 years All accumulated contributions and dividends thereon.

Statement of provident fund account balance

Each contributor is provided by the Treasurer of the Fund with a statement of provident fund account in September and March each year. These statements show the balance standing to the credit of each contributor’s account at the previous 31 August and 28 February (or 29 February as appropriate) respectively. The March statement

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incorporates the latest annual dividend declared by the Board for the year ended the previous 31 August. The supervisor of each school also maintains a provident fund account for each contributor in his school and these accounts are available for inspection by contributors.

Payments to outgoing contributors

Except for the peak months of August and September, payments of benefits to the outgoing contributors are made by the Fund within 23 working days from the date of receipt of the outgoing contributor’s application by the Permanent Secretary for Education or the effective date of ceasing to be a teacher, whichever is later. Payments are made by the Fund within 28 working days for the two peak months. Both pledges are subject to the condition that the withdrawal application is correctly completed by the outgoing contributor.

Investment Management

The day-to-day management of the Fund is the responsibility of the Treasurer who is appointed by the Director of Accounting Services under rule 6(1) of the Grant Schools Provident Fund Rules. The investment functions are the responsibility of the Board of Control which formulates the investment strategies of the Fund within the investment framework approved by the Financial Secretary. All sum considered by the Board to be surplus to the normal cash requirements of the Fund may at the direction of the Board be invested by the Treasurer as well as external investment managers who are appointed by the Board with the approval of the Financial Secretary.

An Investment Sub-committee is formed by the Board and meets on a quarterly basis to:

(a) review the investments made and to verify that they were made within the approved framework and strategy of the Fund,

(b) interview investment managers regarding their performance and obtain their views on various financial markets, and

(c) discuss and formulate investment strategies for recommendations to the Board of Control.

Accounts and audit

Apart from other duties described in the Fund Rules, the Treasurer maintains proper accounts and records of all transactions of the Fund and prepares the annual financial statements for audit by the Director of Audit. The audited financial statements together with the auditor’s report are placed before the Board at the annual general meeting.

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GRANT SCHOOLS PROVIDENT FUND BOARD OF CONTROL

Back Row Front Row

(From Left to Right) (From Left to Right)

1. Mr WAI Wing-yin, Eric 1. Mr CHENG Kwun-kit, Allan 2. Ms LEE Kam-ha, Melaine 2. Dr SO Ying-lun

3. Mr TONG Wun-sing 3. Mr WONG Shing-hei, Charlix, JP 4. Mr TSO Yan-chung, Mikel 4. Ms LEUNG Yin-fun, Fanny (Treasurer) 5. Ms HON Hin-yan

Not in the picture 1. Mr AU Man-hin

2. Ms LAM Yuen-fan, Fanny 3. Mr LEUNG Wai-kit, Ricky

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GRANT SCHOOLS PROVIDENT FUND BOARD OF CONTROL

1.9.2017– 31.8.2018

Chairman

Dr SO Ying-lun Wah Yan College, Hong Kong

Vice-Chairman Mr CHENG Kwun-kit, Allan Ying Wa College

Members

Mr AU Man-hin Diocesan Girls’ School

Ms LAM Yuen-fan, Fanny Heep Yunn School

Ms LEE Kam-ha, Melaine Maryknoll Convent School Mr LEUNG Wai-kit, Ricky St. Mark’s School

Mr TONG Wun-sing La Salle College

Mr TSO Yan-chung, Mikel (From 28.9.2017)

St. Mary’s Canossian College Mr WAI Wing-yin, Eric Wah Yan College, Kowloon

Ms HON Hin-yan Representative of Permanent Secretary for Education and Secretary to the Board Mr SIU Man-tat, Martin, JP

(Up to 2.1.2018)

Mr WONG Shing-hei, Charlix, JP (From 3.1.2018)

Director of Accounting Services

Director of Accounting Services

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GRANT SCHOOLS PROVIDENT FUND BOARD OF CONTROL

From 1.9.2018

Chairman

Dr SO Ying-lun Wah Yan College, Hong Kong

Vice-Chairman Mr CHENG Kwun-kit, Allan Ying Wa College

Members

Mr AU Man-hin Diocesan Girls’ School

Ms LAM Yuen-fan, Fanny Heep Yunn School

Ms LEE Kam-ha, Melaine Maryknoll Convent School Mr LEUNG Wai-kit, Ricky St. Mark’s School

Mr TONG Wun-sing La Salle College

Mr TSO Yan-chung, Mikel St. Mary’s Canossian College Mr WAI Wing-yin, Eric Wah Yan College, Kowloon

Ms HON Hin-yan Representative of Permanent Secretary for Education and Secretary to the Board Mr WONG Shing-hei, Charlix, JP Director of Accounting Services

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GRANT SCHOOLS PROVIDENT FUND INVESTMENT SUB-COMMITTEE 1.9.2017 – 31.8.2018

Chairman

Dr SO Ying-lun Wah Yan College, Hong Kong

Members Mr CHENG Kwun-kit, Allan Ying Wa College

Mr LEUNG Wai-kit, Ricky St. Mark’s School

Mr WAI Wing-yin, Eric Wah Yan College, Kowloon Mr SIU Man-tat, Martin, JP

(Up to 2.1.2018)

Mr WONG Shing-hei, Charlix, JP (From 3.1.2018)

Director of Accounting Services

Director of Accounting Services

Treasurer

Ms LEUNG Yin-fun, Fanny Assistant Director of Accounting Services

Secretary

Ms Tse Yuk-lin, Cathy Treasury Accountant

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GRANT SCHOOLS PROVIDENT FUND INVESTMENT SUB-COMMITTEE From 1.9.2018

Chairman

Dr SO Ying-lun Wah Yan College, Hong Kong

Members Mr CHENG Kwun-kit, Allan Ying Wa College

Mr LEUNG Wai-kit, Ricky St. Mark’s School

Mr WAI Wing-yin, Eric Wah Yan College, Kowloon Mr WONG Shing-hei, Charlix, JP Director of Accounting Services

Treasurer

Ms LEUNG Yin-fun, Fanny Assistant Director of Accounting Services

Secretary

Ms TSE Yuk-lin, Cathy Treasury Accountant

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CHAIRMAN’S REPORT

(Amounts expressed in millions of Hong Kong dollars, unless otherwise stated.) Dividend

I am pleased to report that at the annual general meeting held on 16 January 2019, the Board of Control (BoC) declared a guaranteed dividend of 5% for contributors for the year ended 31 August 2018.

Contributors’ Account

During the year, 121 new contributors joined the Fund and 101 withdrew from it.

These figures include 49 transfers in from and 36 transfers out to the Subsidized Schools Provident Fund. The total number of contributors increased by 20 or 1.74% to 1,169. The balance of the contributors’ account increased by HK$118.0 million or 3.97% to HK$3,090.2 million. The service profile of contributors who withdrew from the Fund during the year was as follows:

2018 2017

Below 10 years 26% 33%

10 to 15 years 10% 9%

Above 15 years 64% 58%

Net Assets and Management Cost

As at 31 August 2018, the net assets of the Fund amounted to HK$3,787.8 million. The cost of managing the Fund by way of supervision fee paid to Government, fees of investment managers, fees of custodians, investment transaction costs and other operating expenses was HK$9.1 million – equivalent to 0.24% of the Fund’s net assets.

Major Activities of the Board of Control

At the annual general meeting held on 29 January 2018, the BoC adopted the annual

statement of accounts of the Fund and declared a dividend of 5% for the year ended 31 August 2017.

The BoC also approved the following matters during the year ended 31 August 2018:

(a) the Fund’s investment plan for the year;

(b) the Fund’s supervision fee budget for the year; and

(c) appointment of an investment consultant to conduct the investment strategies review.

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Vote of Thanks

Mr SIU Man-tat, Martin, JP ceased to be a member of the BoC during the year. On behalf of the BoC, I thank him for his invaluable contributions to the work of the BoC in the past year.

Financial Highlights for the year ended 31 August 2018

2018 2017 Changes

Contributors’ Account (a) 3,090.2 2,972.2 +3.97%

Net Assets (b) 3,787.8 3,621.6 +4.59%

Management Cost

(as a percentage of net assets)

9.1 (0.24%)

8.0 (0.22%) Reserve Level at year end (%)

- before the year’s dividend [(b)-(a)]/(a) above

22.57 21.85

- after the year’s dividend 16.74 16.04

Investment Return for the year (%) 5.52 11.44

Total Dividend Declared (%) 5.00 5.00

Number of Contributors 1,169 1,149 +1.74%

Performance Indicator

2018 2017

Proportion of cases of withdrawal paid within 23 working days for October to July or 28 working days for peak months of August and September

100.00% 100.00%

Dr SO Ying-lun

Chairman Board of Control

Grant Schools Provident Fund 16 January 2019

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GRANT SCHOOLS PROVIDENT FUND

TREASURER’S REPORT FOR THE YEAR ENDED 31 AUGUST 2018 (Amounts expressed in millions of Hong Kong dollars, unless otherwise stated.)

1. FINANCIAL STATEMENTS

The financial statements of the Fund have been drawn up in accordance with accounting treatments stipulated in the Fund Rules and accounting principles generally accepted in Hong Kong.

2. FINANCIAL RESULTS (i) Overall Surplus

The Fund recorded an overall surplus of HK$196.0 million for the year as follows:

Operating surplus 75.5

Net realised and revaluation gains 120.5

Overall surplus 196.0

(ii) Investment Return

The overall surplus represented an investment return of 5.52% (2017:

overall surplus of 11.44%) of the Fund for the year.

(iii) Asset Cover/Reserve Level - Before the year’s dividend

The financial strength of a defined-contribution scheme is measured in terms of its asset cover (or reserve level), i.e. the adequacy of its assets to meet the benefits payable to scheme members.

The Fund’s net assets covered its liability (represented by the year-end balance of the contributors’ account before provision for the year’s dividend) by 1.23 times, providing a reserve level of 22.57% as follows:

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Net Assets (a) 3,787.8 Less: Contributors’ Account

(before the year’s dividend) (b) 3,090.2

Reserve (c) 697.6

Asset Cover (a)/(b) 1.23 times (2017 : 1.22 times) Reserve Level (c)/(b) 22.57% (2017 : 21.85%)

3. DIVIDEND CALCULATION FOR THE YEAR

The Board has agreed to determine each year’s annual dividend on the basis of the level of reserve held by the Fund at year end and the investment return actually achieved on the Fund’s assets during the year by way of a dividend formula.

The dividend formula comprises two components:

〈--- (a) ---〉 〈--- (b) ---〉

(Reserve Level - 40%)÷(1 + 40%)+(Fund Return × Adjusted Reserve Level)

where Reserve Level refers to Pre-dividend Reserve Level and the total dividend is subject to a minimum of 5%.

(a) - provides for releasing the excess over the target Pre-dividend Reserve Level of 40%. This component will be zero if the Reserve Level is 40%

or less.

(b) - provides for releasing a portion of investment return based on the Reserve Level. If the Reserve Level is 40% or less, then the Adjusted Reserve Level is simply the Reserve Level. If the Reserve Level is above 40%, then the Adjusted Reserve Level is 40%.

The dividend formula comes up with a dividend rate of 1.25%. Since the calculated annual dividend is below 5%, the dividend for this year shall be the guaranteed 5%. The dividend calculation has been audited by the Director of Audit.

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4. DECLARATION OF THE GUARANTEED DIVIDEND AND TRANSFER FROM THE RESERVE FUND

I recommend that the Board:

(a) transfer a sum of HK$79.0 million from the Reserve Fund to the Income and Expenditure Account in accordance with rule 11(3) of the Grant Schools Provident Fund Rules, and

(b) declare a guaranteed dividend of HK$154.5 million out of the Income and Expenditure Account which will be distributed as follows:

(i) a credit of 5% in respect of each contributor’s account which is open for the entire financial year commencing 1 September 2017 as the guaranteed dividend in accordance with rule 12(1), and

(ii) a credit of pro rata dividend in respect of each contributor’s account which is not open for the entire financial year commencing 1 September 2017 in accordance with rule 14.

The above appropriations have been incorporated in the financial statements.

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5. ASSET COVER / RESERVE LEVEL - After the year’s dividend

After provision for the total dividend of 5% for the year, the asset cover of the Fund stood at 1.17 times and the level of reserve at 16.74% as follows:

Net Assets (a) 3,787.8

Less: Contributors’ Account (after the year’s dividend):

Contributors’ Account 3,090.2

Provision for the year’s dividend 154.5

(b) 3,244.7

Reserve (c) 543.1

Asset Cover (a)/(b) 1.17 times (2017 : 1.16 times)

Reserve Level (c)/(b) 16.74% (2017 : 16.04%)

6. INVESTMENT OBJECTIVE AND CRITERIA

The Fund’s investment objective is to maximise the recurrent and capital returns on the Fund assets and at the same time observe the principle of prudence.

The Fund is governed by an investment framework approved by the Financial Secretary. The framework sets down broad limits for various classes of investment and defines the quality or credit rating of individual types of securities permitted for investment. All investment decisions of the Fund are made within this framework.

7. INVESTMENT RESPONSIBILITIES

Each year the Board of Control approves an annual investment plan consistent with the Fund’s investment objective. The investment performance of the Fund is then monitored through the Investment Sub-committee which meets on a quarterly basis to review investment reports prepared by the Treasurer and to interview the Fund’s external investment managers.

Investment of funds is the responsibilities of the Treasurer and the Fund’s external investment managers. The Treasurer has the additional responsibility of providing investment guidelines to the investment managers and, with the assistance of the custodians, ensuring that their activities are in compliance with these guidelines.

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8. INVESTMENTS

As at 31 August 2018, the Fund’s investment portfolios amounted to HK$3,761.1 million of which HK$2,957.9 million or 78.64% was placed under the management of external investment managers. The distribution of the investments in proportion terms was as follows:

Managed by

Managed by Investment

Investments Treasurer Managers Overall

% % %

Equity securities listed in Hong Kong 17.27 17.27 Debt securities denominated in Hong

Kong dollar

0.76 9.77 10.53

Hong Kong dollar fixed deposits 13.41 13.41

Equity securities listed outside Hong Kong

34.99 34.99

Debt securities denominated in currencies other than Hong Kong dollar

3.12 16.22 19.34

Fixed deposits denominated in currencies other than Hong Kong dollar

4.07 4.07

Call deposits and balances with custodians denominated in currencies other than Hong Kong dollar

0.36 0.36

Trading financial instruments

- assets 0.06 0.06

- liabilities (0.03) (0.03)

21.36 78.64 100.00

The Fund’s external investment managers were as follows:

First State Investments (Hong Kong) Limited

Schroder Investment Management (Hong Kong) Limited State Street Global Advisors Asia Limited

Wellington Management Company LLP

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The ten single largest securities holdings in the Fund’s investment portfolios were:

9. AUDITED FINANCIAL STATEMENTS

The financial statements of the Fund for the year ended 31 August 2018 have been audited by the Director of Audit. The audited financial statements together with the auditor’s report will be placed before the Board at the annual general meeting to be held on 16 January 2019.

LEUNG Yin-fun, Fanny

Treasurer Grant Schools Provident Fund

10 January 2019 Equities

HSBC Holdings Plc 81.3

Tencent Holdings Limited 66.9

AIA Group Limited 45.1

China Construction Bank Corporation Limited 39.0

Apple Inc. 35.8

Industrial and Commercial Bank of China Limited 31.6

Microsoft Corporation 26.5

Debt Securities

Industrial and Commercial Bank of China Limited 2.905% 13/11/2020 47.1 China Construction Bank (Asia) Corporation Limited 3.25% 02/07/2019 39.0

Bank of China Limited 2.375% 14/02/2020 31.3

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Spread of Net Assets as at 31 August 2018

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Equity securities listed in Hong Kong HK$650 million (17.16%)

(2017: 20.79%)

Debt securities denominated in Hong Kong dollar HK$396 million (10.45%) (2017: 10.60%)

Hong Kong dollar deposits, net trading financial instruments and net accounts receivable HK$532 million (14.05%) (2017: 11.24%)

Equity securities listed outside Hong Kong HK$1,316 million (34.74%) (2017: 32.30%)

Deposits denominated in currencies other than

Hong Kong dollar HK$167 million (4.41%) (2017: 6.46%)

Debt securities denominated in currencies other than Hong Kong dollar HK$727 million (19.19%) (2017: 18.61%) TOTAL: HK$3,788 million

(2017: HK$3,622 million)

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Report of the Director of Audit

Independent Auditor’s Report

To the Board of Control, Grant Schools Provident Fund

Opinion

I certify that I have audited the financial statements of the Grant Schools Provident Fund set out on pages 24 to 49, which comprise the balance sheet as at 31 August 2018, and the income and expenditure account, reserve fund, statement of changes in net assets available for benefits and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In my opinion, the financial statements of the Grant Schools Provident Fund are prepared, in all material respects, in accordance with rule 15(1) of the Grant Schools Provident Fund Rules made under section 85 of the Education Ordinance (Cap. 279) and the accounting policies set out in note 2 to the financial statements.

Basis for opinion

I conducted my audit in accordance with rule 15(2) of the Grant Schools Provident Fund Rules and the Audit Commission auditing standards. My responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of my report. I am independent of the Grant Schools Provident Fund in accordance with those standards, and I have fulfilled my other ethical responsibilities in accordance with those standards. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

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Responsibilities of the Treasurer, Grant Schools Provident Fund for the financial statements

The Treasurer, Grant Schools Provident Fund is responsible for the preparation of the financial statements in accordance with rule 15(1) of the Grant Schools Provident Fund Rules and the accounting policies set out in note 2 to the financial statements, and for such internal control as the Treasurer, Grant Schools Provident Fund determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Treasurer, Grant Schools Provident Fund is responsible for assessing in conjunction with the Board of Control, Grant Schools Provident Fund the ability of the Grant Schools Provident Fund to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting.

Auditor’s responsibilities for the audit of the financial statements

My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Audit Commission auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with the Audit Commission auditing standards, I exercise professional judgment and maintain professional skepticism throughout the audit. I also:

— identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;

— obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Grant Schools Provident Fund’s internal control;

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— evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Treasurer, Grant Schools Provident Fund; and

— conclude on the appropriateness of the Treasurer, Grant Schools Provident Fund’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Grant Schools Provident Fund’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion.

My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the Grant Schools Provident Fund to cease to continue as a going concern.

John Chu Audit Commission

Director of Audit 26th Floor

Immigration Tower

7 Gloucester Road

10 January 2019 Wanchai, Hong Kong

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GRANT SCHOOLS PROVIDENT FUND BALANCE SHEET

AS AT 31 AUGUST 2018

(Expressed in thousands of Hong Kong dollars)

2018 2017 Note

ASSETS

Cash at banks 9,226 10,897

Investments:

Deposits with banks and other 4 670,978 627,692

financial institutions

Securities 5 3,088,768 2,980,700

Trading financial instruments 6 2,219 1,929 Receivables and other assets 7 37,122 21,490

LIABILITIES

Trading financial instruments 6 (909) (2,184) Payables and other liabilities 8 (19,641) (18,876)

NET ASSETS AVAILABLE FOR BENEFITS 3,787,763 3,621,648

Representing:

Contributors’ account 9 3,090,189 2,972,178

Reserve fund 10 543,090 500,805

Provision for guaranteed dividend 11 154,484 148,665

3,787,763 3,621,648

The notes on pages 29 to 49 form part of these financial statements.

LEUNG Yin-fun, Fanny

Dr SO Ying-lun

Treasurer Chairman

Board of Control

Grant Schools Provident Fund

10 January 2019

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GRANT SCHOOLS PROVIDENT FUND

INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 31 AUGUST 2018

(Expressed in thousands of Hong Kong dollars)

2018 2017

Note

INCOME

Interest income 12 34,178 29,325

Dividend income 13 50,352 46,820

Other income 14 25 2,232

84,555 78,377

EXPENDITURE

Supervision fee 15 (1,216) (1,237)

Fees for investment managers (4,431) (3,923)

Fees for custodians (2,319) (2,097)

Investment transaction costs (786) (568)

Other operating expenses (333) (189)

(9,085) (8,014) OPERATING SURPLUS FOR THE YEAR 75,470 70,363

PROPOSED APPROPRIATION FROM 17 79,014 78,302

RESERVE FUND

PROVISION FOR GUARANTEED DIVIDEND 11 (154,484) (148,665) BALANCE AT THE END OF THE YEAR

The notes on pages 29 to 49 form part of these financial statements.

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GRANT SCHOOLS PROVIDENT FUND

RESERVE FUND FOR THE YEAR ENDED 31 AUGUST 2018

(Expressed in thousands of Hong Kong dollars)

2018 2017 Note

Donations and dividends transferred from 16 814 641

contributors’ account

Net realised and revaluation gains/(losses) on:

- securities 114,825 302,080

- trading financial instruments 4,418 (5,471)

- cash and deposits with banks and other 1,261 (533)

financial institutions

120,504 296,076

Proposed appropriation to income and 17 (79,014) (78,302)

expenditure account

Dividends (under)/over-provided in previous year (19) 16

42,285 218,431

Balance brought forward from previous year 500,805 282,374 BALANCE CARRIED FORWARD 543,090 500,805

The notes on pages 29 to 49 form part of these financial statements.

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GRANT SCHOOLS PROVIDENT FUND

STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED 31 AUGUST 2018

(Expressed in thousands of Hong Kong dollars)

2018 2017

Note

OPERATING SURPLUS FOR THE YEAR 75,470 70,363

Net realised and revaluation gains 120,504 296,076

Contributions from contributors 9 46,031 42,912

Donations from the Government and 9 116,253 109,928

Direct Subsidy Scheme schools

Net transfers (to)/from 9 (8,718) 4,307

Subsidized Schools Provident Fund

Withdrawals by ex-contributors 9 (183,425) (134,230) CHANGES IN NET ASSETS AVAILABLE 166,115 389,356

FOR BENEFITS

NET ASSETS AVAILABLE FOR BENEFITS 3,621,648 3,232,292 AT THE BEGINNING OF THE YEAR

NET ASSETS AVAILABLE FOR BENEFITS 3,787,763 3,621,648 AT THE END OF THE YEAR

The notes on pages 29 to 49 form part of these financial statements.

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GRANT SCHOOLS PROVIDENT FUND

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 AUGUST 2018 (Expressed in thousands of Hong Kong dollars)

2018 2017 Note

Cash flows from operating activities

Operating surplus for the year 75,470 70,363

Interest income 12 (34,178) (29,325)

Dividend income 13 (50,352) (46,820)

Net realised and revaluation gains 120,504 296,076

Increase in investments in securities (108,068) (433,518)

(Increase)/Decrease in investments in fixed deposits (116,547) 10,859

with original maturities beyond three months

Change in trading financial instruments (1,565) 2,827

(Increase)/Decrease in receivables and other assets (13,365) 5,189

Increase/(Decrease) in payables and other liabilities 3,642 (4,030)

Elimination of foreign exchange differences in

28 (336) revaluation of cash and cash equivalents

Interest received 31,456 27,489

Dividends received 50,864 45,129

Net cash used in operating activities (42,111) (56,097)

Cash flows from financing activities

Contributions from contributors 46,031 42,912 Donations from the Government and 116,253 109,928

Direct Subsidy Scheme schools

Net transfers (to)/from Subsidized Schools (8,718) 4,307

Provident Fund

Withdrawals by ex-contributors (186,359) (131,353) Net cash (used in)/from financing activities (32,793) 25,794 Net decrease in cash and cash equivalents (74,904) (30,303) Cash and cash equivalents at the beginning of the year 97,979 127,946 Effects of exchange rate changes on cash and cash (28) 336

equivalents

Cash and cash equivalents at the end of the year 18 23,047 97,979

The notes on pages 29 to 49 form part of these financial statements.

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GRANT SCHOOLS PROVIDENT FUND

NOTES TO THE FINANCIAL STATEMENTS

(Amounts expressed in thousands of Hong Kong dollars, unless otherwise stated.)

1. LEGISLATION

The Grant Schools Provident Fund (the Fund) is a retirement scheme governed by the Grant Schools Provident Fund Rules (Fund Rules) made under section 85 of the Education Ordinance (Cap. 279).

2. SIGNIFICANT ACCOUNTING POLICIES (a) Financial reporting framework

The Fund has adopted a financial reporting framework incorporating the requirements of the Fund Rules and applicable requirements of Hong Kong Financial Reporting Standards (HKFRSs), which is a collective term that includes all applicable individual HKFRSs, Hong Kong Accounting Standards (HKASs) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). A summary of the significant accounting policies adopted by the Fund is set out below.

(b) Basis of preparation of the financial statements

The measurement basis used in the preparation of the financial statements is historical cost except that investments in securities at fair value and trading financial instruments are stated at their fair value as explained in the accounting policies set out below (see note 2(c)).

The preparation of financial statements in conformity with the financial reporting framework (note 2(a)) requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenditure. The estimates and associated assumptions are based on experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

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There are no critical accounting judgements involved in the application of the Fund’s accounting policies. There are also no key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in the next year.

(c) Financial assets and financial liabilities (i) Initial recognition

The Fund classifies its financial assets and financial liabilities into different categories at inception, depending on the purpose for which the assets were acquired or the liabilities were incurred.

The categories are: trading financial instruments, securities at fair value, loans and receivables, held-to-maturity securities and other financial liabilities.

Financial assets and financial liabilities are measured initially at fair value, which normally equals to the transaction price, plus transaction costs for loans and receivables, held-to-maturity securities and other financial liabilities that are directly attributable to the acquisition of the financial asset or the issue of the financial liability. Transaction costs on trading financial instruments and securities at fair value are expensed immediately.

The Fund recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instruments. Regular way purchases and sales of financial assets are accounted for at trade date.

(ii) Basis of recognition of gains or losses

The Fund has adopted the requirements of Fund Rule 11 to recognise revaluation gains or losses arising from changes in fair value and realised gains or losses on derecognition of financial instruments in the reserve fund (see note 2(c)(iii) and (v)). This is different from the accounting treatment required under HKAS 39 Financial instruments: Recognition and measurement where such gains or losses are recognised in the income and expenditure account.

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(iii) Categorisation

Trading financial instruments

These comprise forward currency contracts used by the Fund to manage its risks associated with foreign currency fluctuations.

Such derivative financial instruments do not qualify for hedge accounting and are categorised as “trading” under HKAS 39.

Trading financial instruments are carried at fair value, and presented as assets when the fair value is positive and as liabilities when the fair value is negative. In accordance with Fund Rules 11(1)(a)(iv) and 11(1)(b)(iii), changes in the fair value are recognised as revaluation gains or losses in the reserve fund in the period in which they arise.

Securities at fair value

Securities at fair value consist of equity and debt securities managed by the Fund’s external investment managers (note 19(a)). These investments are designated upon initial recognition at fair value and carried at fair value under HKAS 39. In accordance with Fund Rules 11(1)(a)(iv) and 11(1)(b)(iii), changes in the fair value are recognised in the reserve fund as revaluation gains or losses in the period in which they arise.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.

This category includes cash at banks, deposits with banks and other financial institutions, and receivables and other assets.

Loans and receivables are carried at amortised cost using the effective interest method less impairment losses, if any (note 2(c)(vii)).

The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.

When calculating the effective interest rate, the Fund estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees received or paid between parties to the contract

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Held-to-maturity securities

Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed maturity which the Fund has the positive intention and ability to hold to maturity, other than (a) those that the Fund, upon initial recognition, designates as at fair value; and (b) those that meet the definition of loans and receivables.

Held-to-maturity securities are carried at amortised cost using the effective interest method less impairment losses, if any (note 2(c)(vii)).

Other financial liabilities

These are financial liabilities other than trading financial instruments. They are carried at amortised cost using the effective interest method.

(iv) Fair value measurement principles

The Fund measures its investments in securities and trading financial instruments at fair value at each balance sheet date.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either (a) in the principal market for the asset or liability, or (b) in the absence of a principal market, in the most advantageous market for the asset or liability; and the Fund has access to these markets at the measurement date.

The fair value of an asset or a liability is measured with those assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest.

The Fund uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. The Fund measures fair values using the following fair value hierarchy that reflects the significance of inputs used in making the measurements:

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Level 1 – fair values are quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 – fair values are determined with inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3 – fair values of financial instruments are determined with inputs that are not based on observable market data (unobservable inputs).

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Fund determines whether transfers between levels in the hierarchy should be reflected in the financial statements by re-assessing categorisation (based on the level of input that is most significant and relevant to the fair value measurement as a whole) at the balance sheet date.

(v) Derecognition

A financial asset is derecognised when the contractual rights to receive the cash flows from the financial asset expire, or where the financial asset together with substantially all the risks and rewards of ownership have been transferred.

The Fund uses the weighted average method to determine realised gains and losses to be recognised in the reserve fund on derecognition in accordance with Fund Rules 11(1)(a)(i) and 11(1)(b)(i).

A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or when it expires.

(vi) Offsetting

Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet where there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously.

(vii) Impairment of financial assets

The carrying amounts of loans and receivables and held-to-maturity securities are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such

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present value of estimated future cash flows discounted at the asset’s original effective interest rate. If in a subsequent period the amount of such impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the reserve fund.

(d) Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents include cash at banks, deposits with banks and other financial institutions and short-term highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, having been within three months of maturity when placed or acquired.

(e) Contributions and donations

Contributions are received from contributors and donations are received from the Government and Direct Subsidy Scheme (DSS) schools.

Contributions and donations are recognised on an accrual basis.

(f) Revenue recognition (i) Interest income

Interest income is recognised in the income and expenditure account on an accrual basis, using the effective interest method.

(ii) Dividend income

Dividend income from equity securities is recognised in the income and expenditure account when the share price is quoted ex-dividend.

(iii) Other income

Other income is recognised in the income and expenditure account on an accrual basis.

(g) Foreign currency translation

Foreign currency transactions during the year are translated into Hong Kong dollars using the spot exchange rates at the transaction dates.

Monetary assets and liabilities denominated in foreign currencies are translated into Hong Kong dollars at the closing exchange rates at the balance sheet date. In accordance with Fund Rules 11(1)(a)(iv) and 11(1)(b)(iii), all foreign currency translation differences are recognised as revaluation gains or losses in the reserve fund in the period in which they arise.

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3. CHANGES IN ACCOUNTING POLICIES

The HKICPA has issued a number of new and revised HKFRSs which are effective for the current accounting period. There have been no significant changes to the accounting policies applied in these financial statements for the years presented as a result of these developments. The Fund has not applied any new standard that is not yet effective for the current accounting period (note 21).

4. DEPOSITS WITH BANKS AND OTHER FINANCIAL INSTITUTIONS

2018 2017

Fixed deposits denominated in:

 

Hong Kong dollar 504,260 393,290

US dollar 152,897 221,668

Call deposits and balances with custodians denominated in currencies other than Hong Kong dollar:

US dollar 11,517 11,974

other currencies 2,304 760

670,978 627,692

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5. SECURITIES

(a) Details

2018 2017

Securities at fair value

Equity securities listed in Hong Kong 649,388 752,932 Equity securities listed outside Hong Kong 1,316,035 1,169,645

1,965,423 1,922,577 Debt securities denominated in:

- Hong Kong dollar 367,560 355,723

- US dollar 274,113 276,257

- other currencies 335,782 317,628

977,455 949,608

Subtotal for securities at fair value 2,942,878 2,872,185

Held-to-maturity securities at amortised cost

Debt securities denominated in:

- Hong Kong dollar 28,480 28,740

- US dollar 117,410 79,775

Subtotal for held-to-maturity securities 145,890 108,515 3,088,768 2,980,700

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(b) Securities holdings exceeding 5% of the asset class as at 31 August

2018 2017

Fair % of Fair % of Issuer Class value class value class

United States Treasury Debt securities 111,516 9.93% 59,226 5.60%

Government of Japan Debt securities 72,212 6.43% 83,106 7.85%

Government of the Hong Kong Special Administrative Region

Debt securities 47,631 4.24% 74,745 7.06%

6. TRADING FINANCIAL INSTRUMENTS

2018 2017

Assets Liabilities Assets Liabilities Forward currency

contracts, at fair value

2,219 909 1,929 2,184

All these forward currency contracts would mature within one year and had a total notional amount of HK$1,507.8 million as at 31 August 2018 (2017: HK$1,396.3 million). The notional amounts of these contracts indicate the volume of outstanding transactions and do not represent the amounts at risk.

7. RECEIVABLES AND OTHER ASSETS

2018 2017

Proceeds receivable from investments sold 19,803 6,401

Interest and dividends receivable 17,248 15,038

Other debtors 71 51

37,122 21,490

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8. PAYABLES AND OTHER LIABILITIES

2018 2017

Unsettled purchases of investments 16,875 13,135 Amount due to the Government of the Hong Kong

Special Administrative Region 1,216 1,237

Fees for investment managers 1,088 1,073

Amount due to ex-contributors - 2,877

Fees for custodians 458 493

Other creditors and accruals 4 61

19,641 18,876 All these liabilities are payable within one year.

9. CONTRIBUTORS’ ACCOUNT

2018

Contributions

Donations from the Government and DSS

schools Dividends Total

Additions for the year 46,031 116,253 148,684 310,968

Net transfers to Subsidized Schools

Provident Fund (700) (2,613) (5,405) (8,718)

Withdrawals by ex-contributors (28,417) (61,970) (93,038) (183,425)

Transfers to reserve fund in accordance with Fund Rule 11(1)(a)(ii)

(709) (105) (814)

Net additions for the year 16,914 50,961 50,136 118,011

Balance brought forward from previous year 544,887 1,169,165 1,258,126 2,972,178 Balance carried forward 561,801 1,220,126 1,308,262 3,090,189

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2017

Contributions

Donations from the Government and DSS

schools Dividends Total Additions for the year 42,912 109,928 140,306 293,146

Net transfers from Subsidized Schools

Provident Fund 859 1,723 1,725 4,307

Withdrawals by ex-contributors (18,990) (42,870) (72,370) (134,230)

Transfers to reserve fund in accordance

with Fund Rule 11(1)(a)(ii) (554) (87) (641)

Net additions for the year 24,781 68,227 69,574 162,582

Balance brought forward from previous year 520,106 1,100,938 1,188,552 2,809,596 Balance carried forward 544,887 1,169,165 1,258,126 2,972,178

Donations from DSS schools for the year amounted to HK$33.8 million (2017: HK$32.7 million).

An analysis of the withdrawals by ex-contributors is shown below:

2018 2017

Retirement 99,537 78,597

Resignation 73,286 50,117

Death and ill health 3,125 5,468

Others (such as contract termination and schools ceasing to be grant schools or DSS schools)

7,477 48

183,425 134,230

Vested contributors’ benefits as at 31 August 2018 amounted to HK$3,077.5 million (2017: HK$2,961.1 million). This amount represents the sum which would be payable to contributors had all contributors left the Fund at that date.

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10. RESERVE FUND

The reserve fund is maintained in accordance with Fund Rule 11.

11. PROVISION FOR GUARANTEED DIVIDEND

The amount represents the provision under Fund Rule 12 for the guaranteed dividend of 5% of the balance of the contributors’ account which was open for the entire financial year ended 31 August 2018 and Fund Rule 14 for payment of pro rata dividends in respect of contributors’ account which was not open for the entire financial year.

Fund Rule 12 provides that, where in any year the guaranteed dividend of 5%

cannot be met by the Fund, the Financial Secretary may direct that an interest-free Government loan be paid to the Fund out of the general revenue to cover the balance of the guaranteed dividend which cannot be met. No such Government loan had been paid to the Fund for the year ended 31 August 2018 (2017: Nil) as the shortfall between the guaranteed dividend and the operating surplus was met by a transfer from the reserve fund (see note 17).

12. INTEREST INCOME

2018 2017 Interest income from:

Debt securities at fair value 20,878 18,886

Held-to-maturity securities 3,692 2,503

Deposits denominated in:

- Hong Kong dollar 5,997 3,552

- US dollar 3,607 2,920

- other currencies 4 1,464

9,608 7,936

34,178 29,325

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13. DIVIDEND INCOME

2018 2017 Dividend income from equity securities

listed:

- in Hong Kong 21,198 22,022

- outside Hong Kong 29,154 24,798

50,352 46,820

14. OTHER INCOME

2018 2017

Tax refund 2,070

Compensations 25 162

25 2,232

15. SUPERVISION FEE

This represents the provision for the supervision fee for the year ended 31 August 2018 payable to the Government of the Hong Kong Special Administrative Region under Fund Rule 6(2) in respect of the costs incurred in administering the Fund.

16. DONATIONS AND DIVIDENDS TRANSFERRED FROM CONTRIBUTORS’

ACCOUNT

Under Fund Rule 13, whenever a contributor with less than 10 years continuous contributory service ceases to be employed as a teacher in a grant school or DSS school (as the case may be), his account shall be closed and the payment due to him shall include a percentage of all Government donations and DSS school donations (if any) and all dividends that have been declared on such donations.

Donations and dividends not payable to him are transferred to the reserve fund in accordance with Fund Rule 11(1)(a)(ii).

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17. PROPOSED APPROPRIATION FROM RESERVE FUND / TO INCOME AND EXPENDITURE ACCOUNT

In accordance with Fund Rule 11(3) and subject to the approval of the Board of Control, it is proposed to transfer a sum of HK$79.0 million (2017: HK$78.3 million) from the reserve fund to the income and expenditure account. The transfer is to cover the shortfall of the operating surplus in meeting the provision of the 5% guaranteed dividend of HK$154.5 million (2017: HK$148.7 million).

18. ANALYSIS OF CASH AND CASH EQUIVALENTS

2018 2017

Fixed deposits with original maturities within three

months

74,348

Cash at banks and call deposits and balances with custodians

23,047 23,631

TOTAL 23,047 97,979

Reconciliation with the balance sheet:

Amounts shown in the balance sheet

Cash at banks 9,226 10,897

Deposits with banks and other financial institutions 670,978 627,692 680,204 638,589 Less: Amounts with original maturities beyond three

months (657,157) (540,610)

Cash and cash equivalents in the statement of cash

flows 23,047 97,979

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19. FINANCIAL RISK MANAGEMENT (a) Investment management and control

The day-to-day management of the Fund is the responsibility of the Treasurer who is appointed by the Director of Accounting Services under Fund Rule 6(1). The investment functions are the responsibility of the Board of Control which formulates the investment strategies of the Fund within the investment framework approved by the Financial Secretary.

All sums considered by the Board to be surplus to the normal cash requirements of the Fund may at the direction of the Board be invested by the Treasurer as well as external investment managers who are appointed by the Board with the approval of the Financial Secretary.

The Fund’s investment objective is to maximise the recurrent and capital returns on the Fund assets and at the same time observe the principle of prudence.

Each year the Board approves an annual investment plan consistent with the Fund’s investment objective. The investment performance of the Fund is then monitored through the Investment Sub-committee which meets on a quarterly basis to review investment reports prepared by the Treasurer and to interview the Fund’s external investment managers.

The investment management and control of the Fund are set out in a documented risk management and investment strategy and reviewed on a regular basis by the Board.

(b) Market risk

Market risk is the risk that changes in market variables such as equity prices, interest rates and currency exchange rates may affect the fair value or cash flows of a financial instrument.

(i) Equity price risk

Equity price risk is the risk of loss arising from changes in equity prices. The Fund’s investments in equity securities are subject to the equity price risk inherent in all equity securities i.e. the value of holdings may fall as well as rise. As at 31 August 2018, the equity securities were included in securities as shown in note 5. The risk is primarily addressed through diversification of investment portfolio in accordance with a documented risk management and investment strategy, and the Fund monitors the risk on a continuous basis.

It was estimated that, as at 31 August 2018, a 10% increase/decrease in the market bid prices of the equity securities, with all other variables held constant, would increase/decrease the revaluation gains recognised in the reserve fund for the year by HK$196.5

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(ii) Interest rate risk

Interest rate risk refers to the risk of loss arising from changes in market interest rates. This can be further classified into fair value interest rate risk and cash flow interest rate risk.

Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. Since a substantial portion of the Fund’s debt securities and all of its deposits with banks and other financial institutions bear interest at fixed rates, their fair values will fall when market interest rates increase. Investments in debt securities are made in accordance with a documented risk management and investment strategy, and the Fund monitors the fair value interest rate risk on a continuous basis.

It was estimated that, as at 31 August 2018 a 100 basis points increase/decrease in interest rates, with all other variables held constant, would decrease/increase the revaluation gains on the debt securities at fair value recognised in the reserve fund for the year by HK$58.9 million (2017: decrease/increase the revaluation gains by HK$56.1 million). As regards held-to-maturity securities, deposits with banks and other financial institutions, since they are all stated at amortised cost, their carrying amounts will not be affected by changes in market interest rates.

Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Fund does not have a significant exposure to cash flow interest rate risk because only a small portion of its debt securities bear interest at rates determined by reference to market interest rates.

(iii) Currency risk

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in currency exchange rates. The Fund’s investments denominated in foreign currencies are exposed to currency risk. The Fund only makes investments denominated in Hong Kong dollar, US dollar and currencies of countries whose foreign currency long-term debt has a high credit rating. The Fund’s exposure to currency risk is handled in accordance with a documented risk management and investment strategy, and the Fund monitors the risk on a continuous basis.

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The net exposure to each currency at the balance sheet date arising from recognised assets and liabilities after taking into account the effect of forward currency contracts is shown below:

2018 2017

Hong Kong dollar 1,856,419 1,791,645

US dollar 1,245,403 1,211,450

Euro 238,347 234,934

Japanese yen 204,613 149,241

Pound sterling 91,451 86,990

Others 151,530 147,388

3,787,763 3,621,648

It was estimated that, as at 31 August 2018, with all other variables held constant:

 a 0.5% increase/decrease in the exchange rate of US dollar against Hong Kong dollar would increase/decrease the net revaluation gains recognised in the reserve fund for the year by HK$6.2 million (2017: increase/decrease the net revaluation gains by HK$6.1 million); and

 a 5% increase/decrease in the exchange rates of other currencies against Hong Kong dollar would increase/decrease the net revaluation gains recognised in the reserve fund for the year by HK$34.3 million (2017:

increase/decrease the net revaluation gains by HK$30.9 million).

(c) Credit risk

Credit risk is the risk that an issuer or a counterparty will cause a financial loss to the Fund by failing to discharge an obligation.

Investments in debt securities, trading financial instruments, and loans and receivables are potentially subject to credit risk. The Fund selects issuer or counterparty with good credit standing, strong financial strength and sizeable capital. The Fund also limits the individual exposure, in accordance with a documented risk management and investment strategy.

Hence the Fund does not have significant exposures to or concentration

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The Fund monitors credit risk on a continuous basis. The maximum exposure to credit risk at the balance sheet date without taking account of collateral held or other credit enhancements, if any, is shown below:

2018 2017

Cash at banks 9,226 10,897

Deposits with banks and other

financial institutions 670,978 627,692

Debt securities 1,123,345 1,058,123

Trading financial instruments 2,219 1,929

Receivables and other assets 37,122 21,490

1,842,890 1,720,131

The credit quality of cash at banks, deposits with banks and other financial institutions and debt securities, analysed by the ratings designated by Moody’s or their equivalents, at the balance sheet date is shown below:

2018 2017 Cash at banks and deposits with banks and other

financial institutions, by credit rating

Aa1 to Aa3 163,068 96,427

A1 to A3 517,136 542,162

680,204 638,589

Debt securities, by credit rating

Aaa 236,206 268,669

Aa1 to Aa3 336,150 245,351

A1 to A3 495,957 484,253

Baa1 to Baa3 55,032 59,850

1,123,345 1,058,123

(d) Liquidity risk

Liquidity risk is the risk that the Fund will encounter difficulty in meeting obligations associated with financial liabilities. The Fund monitors the liquidity requirements on a continuous basis and

Figure

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References

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